In calculating earnings per share, companies deduct preferred dividends from net income if dividends are not declared.
In calculating earnings per share, companies deduct preferred dividends from net income if dividends are not declared.
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Survey ofAccounting, 6th Edition, by Warren
P8-6 Effect offinancing on earnings per share
Three different plans for financing a $5,000,000 corporation areunder consideration by its organizers. Uner each of the followingplans, the securities will be issued at their par of face amount,and the income tax rate is estimated at 40% of income
Plan 1 | Plan 2 | Plan 3 | |
8 % bonds | -- | -- | $2,500,000 |
Preferred 4% stock, $100 par | -- | $2,500,000 | 1,250,000 |
Common stock, $5 par | $5,000,000 | 2,500,000 | 1,250,000 |
Total | $5,000,000 | $5,000,000 | $5,000,000 |
1. Determine for each plan the earnings per share of commonstock, assuming that the income beforebond interest and income taxis $1,000,000.
2. Determine for each plan the earnings per share of commonstock, assuming that the income before bond interest and income taxis $300,000.
3. Discuss the advantages and disadvantages of each plan.
Below is a template from my class...Please use this whenanswering.
1. | Plan 1 | Plan 2 | Plan 3 | |||||
Earnings before interest and income tax | ||||||||
Deduct interest on bonds | - | - | ||||||
Income before income tax | ||||||||
Deduct income tax | ||||||||
Net income | ||||||||
Dividends on preferred stock | - | |||||||
Available for dividends on common stock | ||||||||
Divide by shares of common stock outstanding | ||||||||
Earnings per share on common stock | $1.72 | |||||||
2. | Plan 1 | Plan 2 | Plan 3 | |||||
Earnings before interest and income tax | ||||||||
Deduct interest on bonds | ||||||||
Income before income tax | ||||||||
Deduct income tax | ||||||||
Net income | ||||||||
Dividends on preferred stock | ||||||||
Available for dividends on common stock | ||||||||
Divide by shares of common stock outstanding | ||||||||
Earnings per share on common stock | ||||||||
At December 31, 2013, Shiga Naoya Corporation had the followingstock outstanding.
10% cumulative preferred stock, $100 par, 108,980 shares | $10,898,000 |
Common stock, $5 par, 4,076,200 shares | 20,381,000 |
During 2014, Shiga Naoya did not issue any additional commonstock. The following also occurred during 2014.
Income from continuing operations before taxes | $24,763,000 | ||
|
| ||
Preferred dividends declared |
| ||
Common dividends declared | $2,309,000 | ||
Effective tax rate |
|
Compute earnings per share data as it should appear in the 2014income statement of Shiga Naoya Corporation.
Earnings Per Share
Income From Continuing Operations | ? |
Discontinued Operations | ? |
Net Income / (Loss) | ? |